Assignment of Claims and Debt Transfer in International Trade Transactions

 

September 30, 2023

BRACE Law Firm ©

 

International transactions with foreign companies form the basis of foreign trade business activity, which involves conducting transactions in the field of foreign trade in goods, services, information, and intellectual property.

Under sanctions, the primary difficulties in executing a foreign trade contract include the impossibility of directly paying foreign partners for goods and services. In such cases, third-party payment becomes necessary, followed by a subsequent resolution of the matter. Assignment of claims and transfer of debt under a foreign trade contract serve as the primary methods for settling payment issues for goods, works, and services.

An assignment of claims (cession) is the transfer of a claim by a creditor (the assignor) to another person (the assignee) and is permitted if it does not contradict the law. An assignment of claims is performed based on an agreement concluded between the original creditor (the assignor) and the new creditor (the assignee); this position is outlined in Resolution of the Plenary Session of the Supreme Court of the Russian Federation No. 54 dated December 21, 2017, On Certain Issues of Application of the Provisions of Chapter 24 of the Civil Code of the Russian Federation on the Change of Persons in an Obligation Based on a Transaction (the "Plenary Resolution No. 54").

A transfer of debt from a debtor to another person may be performed by agreement between the original debtor and the new debtor. A debtor's transfer of its debt to another person is permitted with the creditor's consent and is void in the absence of such consent.

For resolving difficulties between foreign partners in international trade, the UNIDROIT Principles of International Commercial Contracts (the "UNIDROIT Principles") provide articles governing the procedure for such situations.

Under Chapter 9 of the UNIDROIT Principles, an assignment of rights means the transfer by agreement from one person (the assignor) to another person (the assignee), including a transfer by way of security, of the assignor's right to payment of a monetary sum or other performance from a third party (the debtor).

Under Article 9.2.1 of the UNIDROIT Principles, an obligation to pay a sum of money or render other performance may be transferred from one person (the original debtor) to another person (the new debtor) by:

• agreement between the original debtor and the new debtor, subject to the creditor's consent to the transfer;
• agreement between the creditor and the new debtor, whereby the new debtor assumes the obligation.

Under Article 9.1.14 of the UNIDROIT Principles, upon assignment, the assignee receives:

• all the assignor's rights to payment or other performance under the contract related to the assigned right;
• all rights securing the assigned right.

Furthermore, under Article 9.1.15 of the UNIDROIT Principles, unless otherwise disclosed to the assignee, the assignor is liable to the assignee for the following:

• the assigned right exists at the time of assignment, unless the right is a future right;
• the assignor is authorized to perform the assignment;
• the right has not been previously assigned to another assignee and is free from any third-party rights or claims;
• the debtor has no defenses;
• neither the debtor nor the assignor has given notice of set-off concerning the assigned right and will not give such notice in the future;
• the assignor will reimburse the assignee for any payment received from the debtor before the notice of assignment was sent.

Regarding assignment agreements in international transactions, if the parties have not determined this issue in the foreign trade contract, the law of the country where the party performing the obligation that is of decisive importance for the contract's content has its residence or principal place of business at the time of the contract's conclusion generally applies.

Additionally, the law applicable to the agreement between the original and new creditors regarding the assignment of a claim is determined in accordance with the rules of the Civil Code of the Russian Federation (the "Civil Code") on the law applicable to the contract. The admissibility of the assignment, the relationship between the new creditor and the debtor, the conditions under which the claim may be presented to the debtor by the new creditor, and the issue of proper performance of the obligation by the debtor are determined by the law applicable to the claim being assigned.

At the same time, when a third party satisfies a creditor's claim against a debtor, the transfer of the creditor's rights to such a third party (the new creditor) by operation of law is determined by the law applicable to the relationship between the original creditor and the new creditor, unless otherwise follows from the law or the totality of the circumstances of the case. In this regard, the relationship between the debtor and the new creditor does not affect the operation of provisions of the law applicable to the obligation between the debtor and the original creditor that are aimed at protecting the debtor.

Furthermore, in the context of international business interaction, it is important to note that, as a general rule, currency transactions between residents during foreign trade activities are prohibited, except for specific cases outlined in currency legislation. Under Article 9(5) of Federal Law No. 173-FZ dated December 10, 2003, On Currency Regulation and Currency Control (the "Law No. 173-FZ" or the "Currency Regulation Law"), residents may conduct currency transactions without restriction related to foreign currency settlements for the payment of monetary claims expressed in foreign currency that have been assigned by non-residents. These non-residents must be persons who, under foreign trade contracts with residents, transfer goods, perform works, provide services, or transfer information and intellectual property results (including exclusive rights) to such residents, or other non-residents who are proper holders of monetary claims against residents under said foreign trade contracts, to residents acting as financial agents (factors) under concluded agreements through which the assignment of monetary claims to such resident financial agents (factors) occurs.

In Which Cases is an Assignment Permitted in International Transactions?

The assignment of rights in international transactions, especially in current political and economic conditions, allows parties to a foreign trade contract to fulfill their obligations. Depending on the type of international trade transaction, upon concluding an assignment agreement, a resident may assign:

• under export contracts — the right to receive export proceeds from a non-resident;
• under import contracts — the right to claim goods or services or, in the case of an advance payment, the right to a refund from a non-resident.

In this case, a non-resident may assign its right to claim:

• under export contracts — goods/services or a refund of an advance from a resident;
• under import contracts — the right to receive payment from a resident for delivered goods/services.

In the Review of Judicial Practice of the Supreme Court of the Russian Federation No. 3 (2015), approved by the Presidium of the Supreme Court of the Russian Federation on November 25, 2015, the court established that the assignment of claims under foreign trade contracts is permissible. The Supreme Court reached this conclusion based on current legislation, under which, pursuant to Article 1 of the Currency Regulation Law, residents conducting foreign trade activity must, within the timeframes provided by foreign trade contracts, ensure:

• receipt from non-residents into their bank accounts at authorized banks of foreign currency or Russian Federation currency due under the terms of such contracts for goods transferred to non-residents, works performed, services rendered, or information and intellectual property results transferred;
• repatriation to the Russian Federation of funds paid to non-residents for goods not imported into the Russian Federation (not received in Russia), works not performed, services not rendered, or information and intellectual property results not transferred.

Thus, if a non-resident fails to fulfill its obligations under a foreign trade agreement, the resident is obligated to ensure the receipt or return of the paid currency proceeds.

Under Article 382(1) of the Civil Code, a right (claim) belonging to a creditor based on an obligation may be transferred by the creditor to another person through a transaction (assignment of claim) or may transfer to another person by operation of law. According to Article 383 of the Civil Code, the transfer of rights inseparably linked to the creditor's personality, particularly claims for alimony and for compensation for harm caused to life or health, is not permitted. As previously noted, the assignment of a claim by a creditor (the assignor) to another person (the assignee) is permitted if it does not contradict the law.

At the same time, Article 14 of the Currency Regulation Law, which establishes the rights and obligations of residents when conducting currency transactions, does not contain a prohibition on residents assigning rights of claim under foreign trade transactions.

The possibility of assigning a claim was also provided for by Clause 7.1.3 of Bank of Russia Instruction No. 138-I dated June 4, 2012, On the Procedure for Submission by Residents and Non-residents of Documents and Information Related to Currency Transactions to Authorized Banks, the Procedure for Executing Transaction Passports, and the Procedure for Accounting and Control of Currency Transactions by Authorized Banks. These same norms were reflected in Bank of Russia Instruction No. 181-I dated August 16, 2017, On the Procedure for Submission by Residents and Non-residents of Supporting Documents and Information to Authorized Banks when Conducting Currency Transactions, on Unified Forms of Accounting and Reporting for Currency Transactions, and the Procedure and Timeframes for Their Submission (the "Instruction No. 181-I"). For example, under Clause 6.1.4 of Instruction No. 181-I, a resident must submit an application to the account bank to close the contract record upon a resident's assignment of a claim under a contract (loan agreement) to a non-resident or upon a resident's transfer of debt under a contract (loan agreement) to a non-resident.

Furthermore, under Article 384(1) of the Civil Code, unless otherwise provided by law or contract, the original creditor's right passes to the new creditor in the same volume and on the same terms that existed at the time of the transfer of the right.

Based on the legal norms listed above, it can be concluded that if an assignment of rights under a foreign trade agreement (contract) is performed, the assignee (the person to whom the right of claim has passed) will be the subject of currency control responsible for fulfilling the requirements established in Article 19(1) of the Currency Regulation Law.

It is important to note that if a resident transfers its rights under a foreign trade contract that is recorded by an account bank, the resident closes the contract record due to the change of parties to the agreement; in this case, the resident is considered to have fully performed its obligations to the creditor (the non-resident). To close the contract record, the resident provides the assignment agreement or debt transfer agreement to the account bank along with an application for closure. After the contract record is closed, the holder of rights under the assignment agreement must, within the established timeframe after the resident closes the record, submit the documents to a new account bank for recording. However, such requirements for closing and recording a foreign trade contract do not apply to cases of partial transfer by a resident of its rights under a contract (loan agreement) recorded at an account bank through a partial assignment of a claim to another resident or a partial transfer by a resident of debt under a contract (loan agreement) recorded at an account bank to another resident.

In addition to the aforementioned Russian legislation and the UNIDROIT Principles, the UNIDROIT Convention on International Factoring applies to relations arising from factoring agreements and the assignment of claims. Under this Convention, a factoring agreement means a contract concluded between a supplier (one party) and a factor (the other party) pursuant to which:

• the supplier may or must assign to the factor receivables arising from contracts for the sale of goods between the supplier and its customers (debtors), except for those cases where goods are purchased for personal, family, or household use;
• the factor must perform at least two of the following functions:
  • financing for the supplier, including loans and advance payments;
  • maintenance of accounts (ledgering) relating to the receivables;
  • collection of receivables;
  • protection against default in payment by debtors;
• debtors must be notified of the assignment of the claim.

The UNIDROIT Convention on International Factoring applies whenever the receivables assigned under a factoring agreement arise from a contract for the sale of goods concluded between a supplier and a debtor who have their places of business in different states and:

• those states and the state in which the factor has its place of business are Contracting States;
• the contract for the sale of goods and the factoring agreement are governed by the law of a Contracting State.

Importantly, the UNIDROIT Convention on International Factoring, which regulates issues related to the assignment of claims, applies to the assignment of monetary claims of a business nature for goods, works, or services that were not acquired for personal, family, or household purposes.

Cases of Prohibition and Impossibility of Assignment

A prohibition on the assignment of claims may be established between the parties to a transaction by agreement or by a section in the main contract, for the violation of which liability may also be established. However, an agreement between a debtor and a creditor to restrict or prohibit the assignment of a claim under a monetary obligation does not invalidate such an assignment and cannot serve as grounds for terminating the contract from which the claim arose; nevertheless, the creditor (assignor) is not released from liability to the debtor for such a breach of agreement.

As a general rule, the assignment of claims under a monetary obligation in violation of a contractual term requiring the debtor's consent or prohibiting assignment is valid regardless of whether the assignee knew or should have known of the agreement between the assignor and debtor prohibiting or restricting assignment. However, if the assignor and assignee, in performing the assignment contrary to said contractual prohibition, acted with the intent to cause harm to the debtor, such an assignment may be declared invalid. Furthermore, the invalidity of the claim transferred based on an assignment agreement does not entail the invalidity of the agreement itself. The invalidity of said claim is, in accordance with Article 390 of the Civil Code, grounds for the assignee to hold the creditor who assigned the claim liable.

Additionally, for a violation of the prohibition on assigning rights, the debtor may demand compensation for necessary expenses and other losses caused by the change of creditor.

Transfer of Debt under a Foreign Trade Contract

When concluding a debt transfer agreement, a resident may transfer its obligations:

• under export contracts — obligations to deliver goods or services or, in the case of an advance payment, to refund it to a non-resident;
• under import contracts — obligations to pay for delivered goods or services from a non-resident.

When transferring debt, a non-resident may transfer:

• under export contracts — obligations to pay a resident for delivered goods or services;
• under import contracts — obligations to deliver goods or services or to refund an advance payment to a resident.

The same rules apply to the form of a debt transfer as to the assignment of claims; that is, for a transaction performed in simple written or notarized form, the corresponding written form must be observed for the debt transfer.

When transferring debt under foreign trade contracts, it is also necessary to consider the provisions of the Currency Regulation Law and the regulations adopted in accordance with it, including Instruction No. 181-I. Chapter 10 of Instruction No. 181-I governs the accounting of operations under contracts (loan agreements) that simultaneously contain terms of an export and import contract, a contract and a loan agreement, or terms for receiving and providing a credit (loan), as well as in cases of assignment of claims or transfer of debt under a contract (loan agreement) to another person, financing against the assignment of a monetary claim arising from a contract, or operations conducted under a contract (loan agreement) by third parties. According to Clauses 10.3 and 10.4 of Instruction No. 181-I, in the event of a resident's partial transfer of its rights under a contract (loan agreement), the contract record is not closed at the account bank; i.e., the UCN remains the same.

Receipt of Payment under a Foreign Trade Contract from a Third Party

The conclusion of a foreign trade contract creates obligations for its two parties: the seller must deliver the goods, and the buyer must pay for them. However, the introduction of sanctions restrictions and changes in the internal legislation of the countries participating in international transactions mean that counterparties must fulfill their obligations to each other without violating the laws of the country in which they are registered. In this regard, payment under foreign trade contracts has begun to be performed by third parties, with the subsequent resolution of the issue through the assignment of claims or transfer of debt.

The performance of an obligation by a third party is provided for by Article 313 of the Civil Code, according to which a creditor is obliged to accept performance offered for the debtor by a third party if the performance of the obligation was assigned by the debtor to said third party. However, the creditor is not obliged to accept performance offered for the debtor by a third party if the law, other legal acts, the terms of the obligation, or its essence require the debtor to perform the obligation personally.

The possibility of payment by a third party within a foreign trade contract is provided for by the UNIDROIT Principles; specifically, under Article 9.2.6, a debtor may, without the creditor's consent, agree with a third party that such person will perform the obligation instead of the debtor, unless the obligation in the specific circumstances is essentially of a personal character. In this case, the creditor retains the right of claim against the debtor.

Legal Risks of Declarations of Invalidity for Assignments or Debt Transfers

Legislation does not provide for specific norms regarding the invalidity of assignment and debt transfer transactions; therefore, general grounds apply. For example, an assignment agreement may be declared void in the following cases:

• The transfer of a claim occurs whose assignment is prohibited by law. A transaction performed in violation of an express legal prohibition is void as infringing upon public interests. The position that an assignment performed in violation of a legislative prohibition is void is reflected in Resolution of the Plenary Session of the Supreme Court of the Russian Federation No. 54 dated December 21, 2017. It is important to note that prohibitions on the assignment of claims may be additionally introduced by regulatory acts; therefore, it is vital to study the legislation in force at the time of the transaction.
• The assignment agreement between commercial organizations, individual entrepreneurs, or between a commercial organization and an individual entrepreneur is performed without consideration. If the assignor receives no remuneration for the assignment, it constitutes a gift. However, the fact that the size of the counter-performance does not match the volume of the transferred right (claim) is not, in itself, grounds for declaring an assignment agreement concluded between commercial organizations void.
• Absence of notarization for the assignment. The assignment of a claim based on a transaction performed in simple written or notarized form must be performed in the corresponding written form.

In addition to the invalidity of an assignment transaction, situations also arise in practice where a transaction may be voidable (challenged by one of its parties):

• An agreement between a debtor and assignor may prohibit or restrict the assignment of a right to receive non-monetary performance.
• Violation of the conditions under which the debtor gave the necessary consent for the assignment. A person giving preliminary consent is entitled to additionally specify the conditions under which it agrees to the transaction. Failure by the parties to comply with said conditions gives a third party the right to challenge it based on Article 173.1 of the Civil Code.
• If the creditor's personality is of significant importance to the debtor, an assignment performed without the debtor's consent may be challenged. If the parties established in the contract that the creditor's personality is of significant importance, but this does not follow from the essence of the obligation, such terms should be qualified as a prohibition on assignment without the debtor's consent. However, in the case of an assignment of a monetary claim, the rule of Article 388(2) of the Civil Code does not apply because the creditor's personality usually does not matter when performing a monetary obligation.

In the case of a debt transfer, there are also situations where a transaction may be declared invalid:

• A debtor's transfer of its debt to another person is permitted with the creditor's consent and is void in the absence of such consent.
• Failure to observe the form of the transaction results in its invalidity — for example, if a debt transfer is performed under a transaction made in notarized form but notarization is not performed for the transfer.
• Absence of payment for a debt transfer, as the court will declare such a transaction void; gifting between commercial organizations is prohibited.

If a debt transfer transaction is declared invalid, the debt does not pass to the new debtor, and the creditor may demand performance only from the original debtor. Furthermore, funds transferred to third parties in performance of an invalid transaction are subject to return by the party to said transaction.

The invalidity of a transaction creates certain legal consequences and obligations for the parties. In this regard, it is important to note that a person who, without grounds established by law, other legal acts, or a transaction, has acquired or saved property (the acquirer) at the expense of another person (the victim) is obliged to return the latter the unjustly acquired or saved property (unjust enrichment).

Assignment and transfer of debt under foreign trade contracts significantly simplify the ability of foreign partners to fulfill their obligations, especially under sanctions restrictions. The assignment of claims and transfer of debt allow participants in a foreign trade contract not only to fulfill their obligations to each other but also to avoid violating the internal legislation of the partner's country.

When using assignments and debt transfers under foreign trade contracts, it is essential to consider the legal norms, restrictions, and prohibitions in force at the time of performance; this will minimize risks for partners regarding both main obligations and the fulfillment of currency legislation by residents and non-residents.

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References

1. Subclause 4 of Article 2 of Federal Law No. 164-FZ dated December 8, 2003, On the Fundamentals of State Regulation of Foreign Trade Activity.
2. Clause 1 of Article 388 of the Civil Code.
3. Clause 1 of Plenary Resolution No. 54.
4. Article 391 of the Civil Code.
5. Document developed by the International Institute for the Unification of Private Law (UNIDROIT).
6. Ruling of the ICAC at the RF CCI dated December 19, 2008, in Case No. 14/2008. The ICAC satisfied the claims for recovery of the principal debt and the penalty amount because the plaintiff proved the fact of delivery of the goods, which the defendant failed to pay for in violation of the contract.
7. Clause 1 of Article 1211 of the Civil Code.
8. Article 1216 of the Civil Code.
9. Article 1216.1 of the Civil Code.
10. The document became invalid on March 1, 2018, due to the issuance of Bank of Russia Instruction No. 181-I.
11. Clause 6.1.3 of Instruction No. 181-I.
12. Clause 10.3 of Instruction No. 181-I.
13. UNIDROIT Convention on International Factoring. Concluded in Ottawa on May 28, 1988.
14. Resolution of the Thirteenth Arbitration Appeal Court dated October 29, 2014, in Case No. A56-71094/2013. Since under the terms of the timber supply agreement the goods were to be received by the supplier from a specific consignor, the consignor's failure to fulfill obligations is grounds for recovering losses incurred by the supplier in connection with the failure to perform the original contract.
15. Article 2 of the UNIDROIT Convention on International Factoring.
16. Clause 3 of Article 388 of the Civil Code.
17. Clause 17 of Plenary Resolution No. 54.
18. Resolution of the Ninth Arbitration Appeal Court dated August 26, 2021, No. 09AP-49015/2021, 09AP-49018/2021 in Case No. A40-67920/2021. Dispute category: Transfer of right, assignment of claim (cession). Claims of the assignor: For recovery of debt for the assigned right under the agreement. Circumstances: The conclusion of the assignment agreement and the guarantee agreement for it did not have the real goal of acquiring the right of claim against the debtor under the loan agreement, but had, among other things, the goal of creating an appearance of good faith in the actions of the plaintiff and defendants when concluding said transactions and creating legitimate grounds for withdrawing assets in the amount claimed for recovery to the accounts of a company under the jurisdiction of a foreign state. Decision: Refused.
19. Clause 18 of Plenary Resolution No. 54.
20. Clause 4 of Article 391 of the Civil Code.
21. Resolution of the Seventeenth Arbitration Appeal Court dated November 12, 2021, No. 17AP-13345/2021-AK in Case No. A60-25651/2021. Claim: To declare invalid the decisions of the customs authority to introduce changes (additions) to the information declared in the goods declarations. Decision: Claim satisfied.
22. Clause 75 of Resolution of the Plenary Session of the Supreme Court of the Russian Federation No. 25 dated June 23, 2015, On the Application of Certain Provisions of Section I of Part One of the Civil Code of the Russian Federation by Courts.
23. Clause 9 of Plenary Resolution No. 54.
24. Clause 1 of Article 575 of the Civil Code.
25. Clause 10 of Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 120 dated October 30, 2007, Review of the Practice of Application of the Provisions of Chapter 24 of the Civil Code of the Russian Federation by Arbitration Courts.
26. Resolution of the Arbitration Court of the Moscow District dated March 25, 2021, No. F05-5925/2017 in Case No. A40-185143/2015. Claim: To declare the preliminary assignment agreement, the main assignment agreement, and the document transfer deed as not having been concluded, and to declare the main assignment agreement invalid. Decision: Claim refused, as it was proven that the contested preliminary and main assignment agreements between the debtor and its counterparty were concluded and performed, in connection with which there are no grounds for declaring them and the transfer deed as not having been concluded. Furthermore, the fact of the debtor selling rights (claims) at a reduced price was not proven, nor was the fact of damage caused to the property rights of the debtor's creditors as a result of the contested transactions.
27. Clause 1 of Article 389 of the Civil Code.
28. Clause 4 of Article 388 of the Civil Code.
29. Clause 56 of Resolution of the Plenary Session of the Supreme Court of the Russian Federation No. 25 dated June 23, 2015, On the Application of Certain Provisions of Section I of Part One of the Civil Code of the Russian Federation by Courts.
30. Clause 10 of Plenary Resolution No. 54.
31. Ruling of the Supreme Court of the Russian Federation dated October 22, 2013, No. 64-KG13-7. Claim: For recovery of debt under a loan agreement and interest for the use of funds. Decision: Claim satisfied, as the fact of improper performance of the contractual obligation by the defendant was confirmed by the materials of the case.
32. Clause 2 of Article 391 of the Civil Code.
33. Resolution of the Arbitration Court of the Moscow District dated November 16, 2021, No. F05-27148/2021 in Case No. A40-161382/2019. Claim: To declare the debt transfer agreement an invalid transaction and apply the consequences of the transaction's invalidity. Decision: Claim satisfied, as the transfer of debt to the debtor was performed without consideration; in this case, the transfer of debt to the debtor was contested, i.e., no termination of the obligation occurred; on the contrary, as a result of assuming the debt (increasing debt obligations), the company became a new debtor in the existing legal relationship.
34. Clause 12 of Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 49 dated January 11, 2000, Review of the Practice of Resolving Disputes Related to the Application of Norms on Unjust Enrichment.
35. Clause 1 of Article 1102 of the Civil Code.